The relationship between confidence and economic activity is well known. All else equal, the higher the confidence the more likely a person is to spend and the more economic activity occurs. There is an obvious correlation between the two.
Correlation and causation are not the same. To illustrate, let’s use an example. A rooster crows at the crack of dawn. The crowing and sunrise are correlated because they occur simultaneously. The causal relationship (i.e., one happens causing the other to happen), if one exists, is less clear. Does the rooster cause the sun to rise? Stupid roosters might believe so, but that clearly is not the case. Whether the sun causes the rooster to crow is more plausible, although for someone who rarely leaves pavement, I am reluctant to even concede that. Another possibility is that the two events are not causally related to each other but to some third factor which produces the sun and rooster effects to occur around the same time.
Confidence and economic activity are correlated. Is there a causal relationship present? If there is, which effects the other? The relationship could be argued either way. There might even be a complex relationship where causation flows both ways, with one feeding off the other. That is, confidence cause economic activity to increase and economic activity causes confidence to rise. The government believes that confidence causes economic activity. At least that is how Charles Hugh Smith views its behavior:
Does believing in the “recovery” make it real? The propaganda policies of the Federal Reserve and the Federal government are based on the hope that you’ll answer “yes.” The entire “recovery” is founded on the idea that if the Fed and Federal agencies can persuade the citizenry that down is up then people will hurry into their friendly “too big to fail” bank and borrow scads of money to bid up housing, buy new vehicles, and generally spend money they don’t have in the delusional belief that inflation is low, wages are rising and the economy is growing.
Mr. Smith knows the answer to his rhetorical question is “No.” Yet many others apparently do not. To believe that confidence can be raised is to believe that rhetoric and manipulated statistics can trump the reality faced by consumers each and every day. Even if that were possible, it is unclear that confidence drives economics instead of the other way around. In essence, government seems to believe that if it can “fix” the rooster the sun will come up tomorrow.
Though government may believe such a causal relationship exists, does not validate the relationship. People are smarter than that. Consumers in over their heads with debt and shrinking disposable income are unlikely to feel more confident just because the government issues some favorable, arcane economic report. How realistic is it to expect the following?
In other words, the “virtuous cycle” of new debt feeding economic growth is based on conning (or brow-beating) the American public into